White Paper

On

Automobile Sector

Submitted by

Manikanda Bharathi S (10314)

Sudip Kar (10343)

Nidhish Agrawal (10319)

 White Paper on Automobile Sector
09-12-2009

Table of Contents

Page No.

• Executive Summary 1

1. Outlook 2

2. Financial Statistics 6

3. Industrial Statistics 7

4. Key Domestic Players 10

5. International Players in Indian Market 11

6. Regulations and Policiesz 12

7. Market Segments and strategies 13

8. References 15

Executive Summary

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 White Paper on Automobile Sector
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The report consists of an analysis of automobile sector on four wheelers segment focusing on
passenger vehicles, Light commercial vehicles and Medium & Heavy commercial vehicles. The paper briefly
describes history and the dynamics of Indian automobile sector. The attractiveness of the industry is
analyzed with the help of Porter’s Five Forces during recession and post recession. Financial analysis is
presented with the help of key financial ratios of the industry. The industry’s growth pattern and behavior is
also interpreted with the help of these ratios. The raw material consumption, employee rate and sales
growth pattern of the industry are described in Industrial analysis. The key players and new entrants of the
Indian automobile industry are described in domestic key players. An overview of Governments regulations
and policies which has affected the automobile industry both in the long run and short run has been
presented. The role of the government during recession and the after effects of the measures have been
presented. Finally various strategies and measures adopted by the auto majors after recession have been
discussed in detail.

Outlook

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 White Paper on Automobile Sector
09-12-2009

Automobile industry is one of the important contributors to the growth of Indian economy. It
currently contributes about 6% to Indian GDP. Over the last few decades Indian automotive industry has
witnessed many challenges, transitions and restructuring owing to factors like 1992 liberalization, favorable
government policies, change in FDI policies, emerging technologies, globalization and others. Over the last
two decades, India has witnessed sustained growth and turned out to be one of the most promising and
highly potential markets of the world. In the last decade India has witnessed double figure growth for most
of the years. India is one among the few markets who have surpassed the recession effectively. 1

In this report we will present the post-recession outlook of Indian four-wheeler auto industry basically
covering the three market segments: Passenger vehicles, Light commercial vehicles and Medium & Heavy
commercial vehicles.

India follows more of an open market dynamics with ever increasing amount of FDI investment, joint
ventures, technological collaboration with foreign entities and set-up of production as well as assembly
facilities in India. 2

Automotive industry contributes 6% to the country’s GDP which leaves a huge scope for further improvement
in this sector. Also India provides one of the biggest consumer markets for the industry to target upon. India
is the seventh largest vehicle manufacturer, largest producer of motorcycle, fourth largest exporter of
automobiles, and the fifth largest manufacturer of commercial vehicles in the world.3

Porter’s Five Forces Model can be used to analyze the automobile market in the country. The five forces are
given as:

Bargaining Power of Suppliers: With the increased competition and costs involved, the auto manufacturers
are outsourcing many of the assembly and manufacturing jobs. Also many auto majors launch new products
in different countries at the same time. So they expect their suppliers to be present at different locations at
the same time. Also in current scenario the direct suppliers are big global firms specialized in complex
systems or other important activities. They are an active part of the designing and engineering process. The
growing importance of suppliers among the manufacturer leads to higher bargaining power of the suppliers
and OEMs. Although during recession bargaining power of the suppliers are reduced because of slump in
demand.

Bargaining Power of Consumers: With increased awareness, fierce competition and high customer
expectations, the bargaining power of consumers is quite high. Also slowdown forces the price sensitivity for
the product among consumers and customer loyalty decreases. As the market has emerged as an attractive
destination after recession, more companies are entering which is resulting in price war thereby further
increasing the bargaining power of the consumer.

Threat of New Entrants: Automotive market is an expensive market and is adequately concentrated.
Investment requirement is high and brand identity plays an important role. Also reach is important which
requires high infrastructure investment. So threat of new entrants is low. During slowdown many countries
face huge decline. So companies are going for internationalization to countries which are more robust. Also
some companies look to diversify in new fields taking the advantage of downturn either through acquisition
or through joint ventures. This increases the threat of new entrants for the growing economy like India.

Threat of Substitutes: Substitutes for automobile would constitute trains, planes, buses and other such
public transports. Also fuel costs could play an important role. However, these are not threatening enough as
the services provided by automobiles are far different than these other transports such as home to home
delivery, all-time service availability and others. So threat of substitutes is low. During slowdown the people

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purchasing capacity reduces. This may affect the demand pattern for the automobiles. The above public
transport may hurt the automobile industry in such instances.

Rivalry among Competing Firms: It is an oligopolistic market with considerable variation in price and
products. However in last few years increased competition and recession has prompted the price war among
competitors to attract more consumers. So although Indian automotive market is oligopolistic in nature the
competition is intense.4

The automobile industry has been facing various challenges because of factors like recession, uncertain
economic climate, rising fuel prices, government emission policies (owing to global warming), increasing raw
material costs, stringent labor laws, basic infrastructure of the country, power, logistics facilities and
others.

To overcome these uncertainties companies are adopting various measures:

• Special focus given to logistics and supply chain management

• Cost cutting especially at production level including layoffs, use of Kaizen production
technology for extracting incremental gains.

• Reducing uncertainties by broadening their operation base in other countries like M&M
becoming the first Indian company to launch its commercial vehicle in the U.S., Maruti
looking for exports to Africa, South America, the Middle East and Australia and Tata Motors
targeting other Asian and African markets

• Technological advancements through joint ventures and acquisitions such as M&M acquiring
70% stakes in Sangyong Motor Company Limited (SYMC) in 2010, JV between Ashok Leyland
and Nissan

• Broadening the customer base targeting the rural market in India such as Tata Motors launch
of Nano, GM special focus in improving the rural sales, Ashok Leyland planning to launch the
products compatible with rural India

• Exploring for low emission cars powered by renewable or bio-fuels as in case of M&M and
Tata motors

• Joint R&D activities with auto component suppliers

Financial Statistics5

The exhibits show the key financial ratios of the passenger cars sector and LCV/HCV sectors of the
Indian automobile industry for the last 10 years. The total sales and YOY growth of all these sectors
combined is also displayed separately.

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• The GAGR from Mar-01 to Mar-08 for the Industry is 13.72%. This steady growth is mainly
attributed to the growth in Indian economy and the huge urban market it had.

• During FY2008-09 and later part of FY2007-08, the automobile industry was hit by recession
and there is a decrease in total sales of the industry compared to the previous years.

• The industry recovered from the slowdown which is evident from the percentage growth in
sales of 33% during FY2009-10. This growth in sales in mainly due to the marketing and
promotional strategy of the industry.

• The PAT of the industry reduced from above 5% to 1.83% during recession. As the top line
could not be increased due to recession, most of the company’s were involved in cost cutting
to save itself from losses.

• Before recession, there was a gradual change in capital structure of the industry for the past
eight years. The industry’s dependence on equity has increased which are evident from the
debt to equity ratio. This change was mainly due to the growth in Indian stock market.

• The industry has generated and maintained interest among the shareholders. The dividend
ratio on an average is 13% over the past years. Except for the recession period, the industry
has an average of around 20% return on equity.

• It can be seen that there is a sudden increase in debt to equity ratio during recession. This is
because that the industry could not sustain itself due to slowdown and had to get financial
help from external resources.

• The industry is working with a current ratio of one on an average. This could be attributed to
the lean manufacturing that all the companies are practicing, their control over the
suppliers and better inventory management.

Exhibit: 1 Exhibit: 2

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Exhibit 3

Industrial Statistics

The exhibits show the number of units produced, sales, value of exported units and Herfindahl index
for Medium and Heavy vehicle industry, passenger cars industry and Light commercial vehicle industry for
the past 10 years.

• Among these three sectors, on an average 62% of sales is contributed by passenger car industry, 27%
by Medium and Heavy vehicle industry and 11% by LCV industry. The contribution of passenger car
industry to total sales has increased in recent years. This is one of the reasons for many global
players entering into Indian passenger car industry.

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• The LCV and MV/HV industry on an average has got 5.5% of their revenue through exports whereas
passenger cars industry export on an average contributes for only 2% of their revenue. These data
shows that Indian automobile industry is mainly dependent on domestic supplies.

• Among the three sectors, Medium and Heavy vehicle industry is the worst hit by recession. Its sales
dropped by 28% in 2008-09 compared to previous year.

• The competition has increased in all the three sectors which are evident from the decrease in
Herfindahl index over the years.

Exhibit 4 Exhibit 5

Exhibit 6 Exhibit 7

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Below exhibit shows the contribution of raw material, employee cost and total expenditure as a percentage
of sales.

• Raw material is the main constituent of cost of unit. It contributes around 71% of total sales of
LCV/HCV industry and 76% of sales of passenger cars industry. This is one of the reasons for
value addition/value engineering (VA/VE) projects being given more importance in automobile
industry. The success of VA/VE projects is evident from the reduction of raw material as a
percentage of sales in passenger car industry. It was reduced from 80% in 2001 to 70% by 2007.
Then because of the steep rise in price of steel and other raw material in 2008, the raw
material as a percentage of sales increased again.

• The employee cost as a percentage of sales has decreased for automobile industry during
past 10 years. This percentage has decreased from 9.8% in 2001 to 5.9% in 2010 for LCV/HCV
industry and from 4% in 2001 to 2% in 2010 for passenger car industry. This decrease in
employee cost as a percentage of sales is attributed to various measures taken by the
automobile companies to increase its production efficiency. The industrial engineering
department has played an important role in companies to achieve increase in productivity by

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implementing some advanced production techniques, total quality management, kaizen and
other manufacturing techniques to improve productivity.

• The total expenditure as a percentage of sales has decreased from 97% to 94% in the past 10
years. As explained earlier, this decrease in percentage is due to decrease in raw material
cost and employee cost of the industry.

Exhibit 8

Key domestic players

The exhibit below shows the market share of key players of MUV & HCV, LCV and passenger car
sector for the past 10 years.

Exhibit9 Exhibit 10

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Exhibit 11

Medium and Heavy Utility Vehicle:

TATA motors is the market leader in this sector with a market share of 55.5% on March 2009. Ashok
Leyland is the second key player with market share of 27%. Eicher motor has a market share of 3%. There is a
decrease in market share of all the three key players in recent years. This is because of new entrants in the
sector. M&M combined with Navistar Ltd (USA) to enter this sector and has a market share of 2.5% in March
2009. V E commercial vehicle which recently entered the market has captured 4.3% of market in a single
year.

Light Commercial Vehicle:

In LCV sector, TATA motors is the market leader with a market share of 52.37% followed by M&M
with share of 29.26%. There are new entrants to this sector in recent years. BMW India Pvt. recently started
their operations in LCV sector and has captured a market share of 9% within two years. V E commercial
vehicle has also entered LCV sector last year.

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Passenger Cars:

Passenger car sector in India is one of the industries with intense competition. With many big players
already involved, new global players are planning to enter the industry. Maruti Suzuki is the market leader
with a market share of 38% followed by Hyundai with a market share of 30%. TATA motors and Honda Siel
Cars are also key players in this sector with a market share of 13% and 7.5 percent respectively.

International Players in Indian Market6

Many big players are entering the Indian market making the competition even more intense. The
European and American companies have predominantly captured the global automotive markets. The
companies of the likes of Toyota, General Motors, Volkswagen, Ford, Fiat, Daimler, Chrysler and BMW have
been on the top of the list for a while.8

Earlier most of their major operations where targeted towards European and American countries but
during recession they have faced huge slump in demand. Two of the big three auto makers have filed for
bankruptcy during recession. India and China turned out to be the first few countries overcoming recession
and reaching the double figure growth rate yet again. The big players are now targeting these countries and
making huge investments to make a dent in the market. In the recent years many big automobile players
have been making huge investments and also using India as their operational base to export vehicles to
different companies gaining cost advantages from the low cost labor and steel availability.

Toyota who has already invested Rs 3200 crore for setting up of its second small car manufacturing
plant is looking for land to go for further expansion of its operations in India.9

On the other hand GM is planning to invest $500 million to expand its operations in India over the next 12
months period.

Ford is already in process of expansion for its new plant and making plans for further expansion of its
production capacity.

Volkswagen is carrying out its investment strategy of about INR 3800 crore in India.10

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Source: http://oica.net/wp-content/uploads/ranking-2009.pdf

Regulations and Policies7

During and after the recession Indian government has extended its support for the Indian automotive
industry through various measures such as reduction in export tariffs, financial assistance, partnering with
Indian companies for research activities. This section will describe the various regulations and policies which
are conclusive to the growth or decline of this industry. Government played an important role in the
development of Indian automotive sector in many ways:

• Reduction of export tariffs to enhance exports

• Automotive Plan 2006-2016 with the intent of making India a manufacturing hub in the global
automotive market space

• Setting up of NATRiP for developing world class testing, homologation and certification facilities

• Adaptation of Euro 3 emission norms considering the environmental and safety standards

• Alignment of safety regulations with Economic Commission for Europe (ECE) regulation

• Reduction in Central Sales Tax from 4% to 3%

• The excise duty on passenger cars has been reduced from 66% in 1992 to 24% in 2009
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• Foreign equity investment up to 100% are allowed

• Favorable fiscal and financial incentives for the in-house R&D activities by companies such as above
125% tax deductions

• Custom duty on WTO-bound segments that is commercial vehicle and auto components has been
reduced to 10% in 2008-09,and others to 10% for CKD units and 60% for SKD/CBU form

• Allocation to the automotive cess fund for promoting R&D activities in the country

• Emphasis on safety and emission norms

• Dropping of foreign exchange neutrality in 2002 Auto Policy

Market segments and Strategies

Three major segments encompass the four wheeler industry which are passenger vehicle,
light commercial vehicle and medium & heavy commercial vehicles. India used to be a labor
intensive industry. Globalization of the automobile industry, increased competition and the global
recession in 2008 has brought about many changes in the functioning of the automobile industries in
India. Sale has been heavily impacted during this period. During Nov 2008 sales of passenger car was
decreased by more than 49%. This forced various companies has opted for different strategies to
overcome the recession. Some companies even took this as an opportunity to increase their
operations around the world.

Major changes that has been seen in the last few year involves:

• Systematic cost reduction program including the layoffs, cutting promotional costs and improving
operational efficiencies such as 3000 job cuts by Tata motors at Pune factory, job cuts in M&M
during in the year 2009

• Adopting cost effective marketing strategies such as internet, video sharing services, social networks
and promotional events

• Exploring the new market base that is increasing the sales from rural market. A major strategy of GM
operations in India. Ford opening 13 new dealerships base in tier II and tier III sectors. Tata motors,
Ashok Leyland and M&M are also trying to exploit the opportunities in this field as evident from the
launch of Tata Nano, Tata magic and cost effective tractors from other companies.

• Heavy investment activities are planned by auto majors in Indian market owing to its high potential
growth. Maruti plan to invest INR1700 crore as a part of their expansion plan, Gm investing $500
million over next two years

• Introduction of low cost compact cars has also been seen as a major step taken by various auto
major in the country

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• Going for green initiative for developing fuel efficient vehicles as evident from the M&M investment
in sustainable mobility initiative and acquisition of major stakes in Reva Electric Car Co Ltd. in 2010,
Tata’s R&D investments for the development of fuel efficient commercial vehicles in India

• Launching range of products in smaller time frame has been seen as the most commonly adopted
strategy among the leading auto players. M&M planning to launch 7 new products in a span of 15-18
months, Ashok Leyland launched about 10 models of tippers and tractor trailers, GM planning to
launch six new vehicles in 2011, Renault planning to launch five cars between 2011-13.

References:
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1. http://www.ficci-b2b.com/sector-overview-pdf/sector-automotive.pdf
http://www.asci.org.in/journals/v22/Indian_Automobile_Industry.pdf
http://www.tradechakra.com/indian-economy/industries/automobile-industry.html

2. http://trak.in/tags/business/2007/06/06/indian-automotive-industry-the-sector-that-is-creating-waves-globally/
http://www.automotiveuniverse.net/reports/indiaanalysis.pdf

3. http://www.rushlane.com/india-is-worlds-7th-largest-vehicle-manufacturer-%E2%80%93-government-of-india-127915.html

4. http://www.2indya.com/2010/05/26/automobile-industry-in-india/
http://elib.kkf.hu/edip/D_14581.pdf
http://www.bizresearchpapers.com/26.%20SturatOrr-FINAL.pdf

5. http://www.autofocusasia.com/management/indian_automotive_industry.htm
http://www.dsir.gov.in/reports/ittp_sme/AutoCompReport.pdf
http://www.autofocusasia.com/automotive_components/interview_auto_components.htm
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf

6. http://top-10-list.org/2010/09/19/top-ten-automakers-2010/

7. http://www.global-innovation.net/publications/PDF/Working_Paper_57.pdf
http://www.siamindia.com/

8. http://top-10-list.org/2010/09/19/top-ten-automakers-2010/

9. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRfqFMhlj5lk
http://www.imap.com/imap/media/resources/AutoIndustryReport_WEB_0E7D3D1839347.pdf
http://www.bsmotoring.com/news/toyota-seeks-land-for-expansion/2301/1

10. http://www.cardekho.com/india-car-news/Ford-India-expansion-plans-281.htm
http://www.thehindubusinessline.com/2010/10/29/stories/2010102952110300.htm
http://www.cartradeindia.com/car-bike-news/volkswagen-india-marks-the-roll-out-of-the-10+000th-car-from-its-chakan-plant-
112565.html

Exhibits:
1. Data collected from CapitalNeoline Database
2. Data collected from EIS Database
3. Data collected from CapitalNeoline Database
4. Data collected from EIS Database
5. Data collected from EIS Database
6. Data collected from EIS Database
7. Data collected from EIS Database
8. Data compiled with the help of Aggregated Balance sheet and P&L collected from CapitalNeoline Database
9. Data collected from EIS Database
10. Data collected from EIS Database
11. Data collected from EIS Database

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